April 17, 2018

Survey: Middle Market Deal Terms

Seyfarth Shaw recently published the 2018 edition of its “Middle Market M&A SurveyBook”, which analyzes key contractual terms for more than 120 middle-market private target deals signed in 2017. The survey focuses on escrow arrangements, survival of reps & warranties, and indemnity terms and conditions in deals with a purchase price of less than $1 billion.

One of the points noted in the survey is the significant impact that R&W insurance continues to have on deal terms. Here’s an excerpt addressing R&W insurance’s influence on escrow arrangements:

– Approximately 36% of all deals surveyed provided for an indemnity escrow. In contrast, approximately 91% of R&W Insured Deals surveyed provided for an indemnity escrow.

– The median escrow amount in 2017 for deals surveyed was 10% of the purchase price, with approximately 35% of deals having an indemnity escrow amount of less than 10% and approximately 13% of deals with an indemnity escrow amount of less than 5%.

– In deals using R&W insurance, the policy typically includes a retention (deductible) equal to approximately 1% of deal value.

Putting aside a “no-survival” deal in which the seller will not indemnify the buyer at all for breaches of representations, typically, the buyer and seller will effectively split the retention amount under the policy through a basket in the purchase agreement of 0.5% of the purchase price and an indemnity escrow amount of 0.5% of the purchase price (which also typically reflects the indemnity cap size under the purchase agreement).

For example, absent R&W insurance, a purchase agreement may have a 0.5% basket and a 10% indemnity cap with a corresponding escrow amount. However, by using R&W insurance, a seller can reduce the indemnity cap (along with the correlating escrow amount) down to 0.5% to effectively cover (with the basket under the purchase agreement) a 1% retention under the R&W insurance policy.

The survey highlights how R&W insurance has influenced other deal terms & separately addresses terms for uninsured transactions. For these non-insured deals, general rep & warranty survival periods were in the 12-18 month range, and median indemnity caps were 10% of the purchase price. Usage of true deductible indemnity baskets also remained high.

John Jenkins